FDC forecasts 25.47% inflation rate for Nigeria in August

The latest forecast from Financial Derivatives Company (FDC) suggests that Nigeria's inflation rate is set to rise significantly in the month of August, reaching 25.47%. Oluwafunmilola Adebowale, a Senior Analyst at FDC, highlighted the key drivers behind this projection, including naira depreciation, higher logistics costs, money supply growth, and other cost push factors. The anticipated inflation rate for August is notably higher than the 24.08% recorded in July, underscoring the ongoing economic challenges facing the country. Adebowale explained that the depreciation of the naira to record lows against the dollar is expected to have a pass-through effect on domestic prices. This was evidenced by the survey conducted in August, which showed an increase in prices for imported commodities due to the higher import costs, while locally produced goods saw a decline in prices due to increased supply during the harvest season. The impending release of the inflation numbers by the National Bureau of Statistics on Friday is expected to reveal the full extent of the inflationary pressures in the Nigerian economy. The forecasted inflation rate has implications for monetary policy decisions, particularly in relation to the Central Bank of Nigeria (CBN) and the Monetary Policy Committee (MPC). In response to rising inflation, the MPC faces the choice of either maintaining the status quo or implementing an interest rate hike to curb inflationary pressures. Adebowale suggested that maintaining the current policy stance could help rein in inflation and boost investor confidence. Strengthening the forex market by increasing dollar inflows was highlighted as a crucial step to stabilize the naira and reduce imported inflation. Comparisons were drawn to Ghana, where a proactive approach to increasing interest rates and diversifying the economy led to a decline in inflation rates. Despite efforts to reform the forex market structure in Nigeria, the fundamental challenge of attracting sufficient dollar inflows remains. Adebowale emphasized the importance of diversifying sources of dollar inflows to support the stability of the naira. Looking ahead, the forecast for food inflation in August stands at 28%, driven by factors such as naira depreciation and a moderate decline in locally produced commodity prices. The impact of high inflation on households was underscored, with Adebowale noting that many Nigerians are grappling with reduced income and increased cost of living, leading to changes in consumption patterns and a shift towards prioritizing necessities. Addressing the structural bottlenecks driving inflation will require coordinated efforts between monetary and fiscal authorities. Adebowale emphasized the need for fiscal interventions to address challenges such as insecurity in food-producing states and improve infrastructure to reduce post-harvest losses. Despite the anticipated slowdown in the pace of inflation increase in the medium term, structural reforms will be essential to sustainably address inflation in Nigeria. In the month of August, month-on-month inflation is projected to remain stable at 2.89%, with the price movements of different commodities offsetting each other. The forecast provides valuable insights into the complex economic landscape in Nigeria, highlighting the urgent need for coordinated policy actions to address inflation and support sustainable economic growth.